Under Armour Has Been Working Out

Investors hadn't seen Under Armour (NYSE: UA  ) for a while, and whatever it's been doing is really working -- we can tell. The company reported analyst-beating earnings this morning, helping jar the stock out of its doldrums. In addition to beating market expectations, the company also raised its guidance, adding to the market's excitement.

Under Armour has managed to outpace Nike (NYSE: NKE  ) in 2013, but the stock is still lagging over the past 12 months. The sports giant -- Nike's market capitalization is about eight times the size of Under Armour's -- has been moving quickly into international markets, while Under Armour still produces 94% of its revenue in North America. But Under Armour has a lot of other irons in the fire, and there is still a lot of room for growth.

New product success
Under Armour has recently launched a series of new products, and these saw good results in the first quarter. Its Baselayer and expanded cotton line helped push apparel revenue up 23% compared to last year, and the company grew footwear revenue by 21% over the same period. The increase in footwear is especially good for Under Armour, as the company is relying heavily on the line for future growth.

Under Armour's three-year plan is to reach $4 billion in sales by 2016. To do that, it needs to grow all of its lines, including footwear. The goal is to have footwear account for $600 million in annual sales by 2016 , and this quarter's $82 million is a great step toward the final goal.

Nike is still dominating the athletic footwear division, though, and its footwear division alone accounted for $3.9 billion in its last quarter. Of that revenue, 54% came from outside of North America, with the biggest international chunk coming out of Western Europe.

Challenges ahead
If Under Armour wants to compete on the global scene, it's going to need to start pushing harder on its international agenda. Again, the 2016 agenda is for big growth, and international sales are forecast to account for 12% of total revenue. That growth is going to put a hit on margins, so Under Armour also needs to slim itself as much as possible, even as it grows.

This quarter, things looked good as gross margin expanded from 45.9% a year ago to 48.3%. That puts Under Armour ahead of Nike, although Nike manages a higher operating and net income margin. The extra cash that Nike has on hand gives it a distinct advantage, but the beauty of the thing is that Under Armour can easily hit its 2016 goals without ever having to take Nike on for the top-dog spot.

In fact, I think Under Armour would do well to sit happily in second place. Nike does most of the hard work, introducing American branding to international markets, and Under Armour can come along behind and pick up a few million here and there. While Under Armour has stalled out over the last 12 months, I think the long-term prospects are good. Its current P/E might put some investors off, and Nike is certainly cheaper by that measure. If you think Under Armour can achieve its goals, though, the stock could very well prove to be worth the premium.

Nike and Under Armour both have a lot riding on their international businesses, and investors do too. If you're interested in other companies making headway overseas, check out the Motley Fool's special report "3 American Companies Set to Dominate the World" shows you how. Click here to get your free copy today.


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